Tax lien auctions are a little-known but juicy Florida financial market worth up to $1 billion a year. And, the Sun Sentinel has found, banks, hedge funds and other financial powerhouses have hit upon a way to game the system, squeeze out the little guy and gobble up most of the good deals.

"I don't think it's fair; it's rigged," said Linda Kliston, of Plantation, a small-scale investor who, like many others in South Florida, finds she can no longer realistically compete.

Big banks are widely blamed for sending America's real estate market and economy into a tailspin beginning in 2007, and then receiving billions of dollars in government bailout loans. Now, some of these same financial heavyweights have found another way to turn the system, and Floridians who can't pay their taxes in time, into a profit center.

The matter involves the buying and selling of the right to collect back state and local taxes on homes and other properties whose owners have fallen behind in paying their taxes. In the jargon of the taxman and real estate lawyer, such claims on delinquent taxpayers are known as "liens." And no state sells more of them than Florida.

If you purchase a lien, you have to immediately pay off the tardy tax bill, which gives municipalities the income they need to pay police, firefighters, schoolteachers and other costs. Then, when the property owner settles up, you recoup the amount you advanced to the tax collector, and can charge the property owner interest as well.

That's when owning tax liens gets financially attractive, especially in economic times like the present, when real estate, stocks and even gold bullion are not reliable havens. A bank CD might pay 0.26% interest a year these days. Florida tax liens guarantee a return nearly 20 times higher, and can generate annual returns of as much as 18%.

For decades, these liens were part of some families' or individuals' investment portfolios, with the proceeds used to help fund retirements, vacations, kids' college tuition and other personal expenses.

Then events coincided to rewrite the script. Uncertainly bred by the Great Recession made the financial returns on liens look extremely attractive to institutional investors, including banks that provide millions of dollars in credit to hedge funds seeking to buy liens.About the same time, tax collectors in Florida started selling the liens online.

Those online auctions have come to be dominated by large financial institutions, which have dramatically increased their odds of winning by forming thousands, even hundreds of thousands, of proxy or shell companies to flood the auction, giving them a huge edge in tie bids where the winner is chosen by lottery.

The gambit is legal under Florida law, but some question whether it's fair. The silly or preposterous names often given the dummy companies — "Yay for Tax Liens," "Pork Chop Sandwiches" and "Spiderman Corp." among them — strongly suggest their creators know there's something absurd about the whole process.

"The majority of the smaller bidders are getting squeezed out or dropping out because they cannot effectively compete," complained Miami real estate agent Murry Diamond, 60, a longtime participant in South Florida tax auctions.

"I'm one of the people they're driving out," Diamond said.

From co-eds to online

Until the sale of liens moved online, beginning in Florida in about 2005, the auctions were held in county auditoriums or courthouses, with participants having to attend in person.

Bidders included representatives of banks and investment funds as well as retirees toting newspapers marked with handwritten notes about liens on advertised properties.

Even then, banks and other big investors had an advantage: They brought in dozens of associates to increase their chances of being chosen, especially in tie votes.

Getting noticed by the auctioneer was key.

If 200 people stand up at one time, "trying to figure out who the actual bidder was was complete madness," recalled Gadsden County Tax Collector Dale Summerford.

To set themselves apart, some would-be lien buyers wore gaudy clothing. Other yelled at the top of their lungs. To better their chances, some financial institutions hired attractive female college students to bid on their behalf.

Mostly local people bought the debt and much of the resulting profit stayed in the area, recalled W. Fred Petty, retired Pinellas County tax collector. "It did not go to New York or Timbuktu."

Today, in the online auctions, bids flood in from all over the world, from cyber competitors who can place thousands of offers within milliseconds with a few keystrokes. The winning bid is supposed to come from the investor who agrees to assess the delinquent homeowner the lowest penalty. But that's far from the whole story.

First, under Florida law, all liens are guaranteed to yield at least a 5 percent return to the buyer over the lifetime of the loan. That's even if the bidder won the lien by agreeing to accept only a quarter of 1 percent, the minimum bid allowed under state rules.

Second, in online auctions, tie bids are broken by a random number generator, a computerized equivalent of how winning numbers are picked in the Florida Lottery.

The result: big investors now all agree to accept the theoretical minimum return, and swamp the system with simultaneous bids to increase their chances at being picked.

At first, firms created thousands of shell companies by applying for and receiving taxpayer ID numbers from the Internal Revenue Service. Then tens of thousands.

Then came what Miami-Dade Tax Collector Fernando Casamayor calls the "nuclear arms race of bidder numbers."

In Broward County the total of bidders went from 20,351 in 2010 to more than 1.1 million the following year.

In last year's property lien auction, Broward topped 2 million bidders. Five investment funds alone accounted for more than 1.4 million of them.

Since the winning bid is now usually chosen at random, the process is akin to tossing the bouquet at a wedding with one bridesmaid having hundreds of thousands of proxies on hand to help her grab it.

"These hedge funds and larger institutions seem to win more and more from the sales every year, whereas the smaller people sort of get shut out," said Kevin Kiernan, partner in a Sarasota-based family investment fund, Luca2 LLC.

One Aventura-based institutional investor, Jonathan Politano, who bid in Broward's 2012 auction through more than 180,000 proxy entities, said he and his colleagues benefit tardy taxpayers by accepting the lowest interest rate.

"Whereas the mom and pops, they're there to get 18 percent," Politano said.

'Little guys are pushed out'

In this bidding arms race, the uncontested superpower in Broward as of last count was an out-of-state entity named "US Bank as Cust for Caz Creek FL LLC." Its sole address on file with the tax collector was a post office box in Cincinnati.

US Bank as Cust for Caz Creek had more than 450,000 separate bidding sub-accounts in 2012 and bid on 13,163 Broward tax liens. It won 3,887 of them with a face value of $19 million. That's the equivalent of a .295 batting average.

The minimum financial return on its liens: $950,000.

So who are these All Stars of finance? It's not easy to determine, or to get them to talk. Records filed with the state show Caz Creek was organized in Delaware and registered to do business in Florida on April 5, 2012, seven weeks before the last Broward tax auction.

U.S. Securities and Exchange Commission records list William J. Cohane and William C. Green as officers in Cazenovia Creek Investment Management of Charlotte, N.C. Cazenovia Creek's web site says the firm offers investment opportunities in real estate, including tax liens.

Calls placed to phone numbers on file for Cohane and Green were not returned.

Another heavy hitter in Broward, TLGFY LLC, set up last year by Tang Capital Management of San Diego, Calif., had registered 20,795 affiliates using culinary references (Swedish Meatballs, Polka Dot Cupcakes), unusual phrases (It never ends part 500), and other whimsical names.

Calls to Tang Capital Management requesting comment were not returned.

Yet another firm, Palm Tree Tax LLC, formed in 2012 by the private investment fund LienBase of Hollywood, Fla., now has more than 200,000 affiliates.

Competing against such behemoths, "the little guys are pushed out," said Fort Lauderdale resident Jason Quinn, who bids as a lone individual.

In 2012 Quinn, a real estate investor, made offers on 18,707 tax lien certificates in Broward and won three. Their face value: $9,586.

His potential return after one year: about $1,300.

Enter the IRS

In implementing their strategy for dominating Florida's tax lien market, institutional investors had an unwitting accomplice: the Internal Revenue Service.

In the online bidding process, Florida counties require that each participant furnish a taxpayer identification number, which is considered adequate proof by local tax collectors that a business exists.

The IRS issues those numbers at no cost. It's a closely guarded secret as to how certain firms were able to apply for and obtain tens and hundreds of thousands of ID numbers.

Some in the industry devised an automated method to deluge the IRS with requests.

"They identified a process that streamlined a common industry practice," said New York tax lien broker Tom McOsker, president of BloxTrade.

Asked how his company created more than 200,000 sub bidders, each with its own IRS number, LienBase partner Joshua Schrager said: "We just work hard and work long hours."

Shocked by the sheer volume of companies registering, Summerford said the Florida Tax Collectors Association questioned IRS officials about the firms' legitimacy, but got no response.

"They were more concerned about simply running out of the numbers," he said.

The IRS's South Florida office declined to answer questions submitted by the Sun Sentinel about the process. On its web site, however, the government agency warns that taxpayer ID numbers "are issued for the purpose of tax administration and are not intended for participation in any other activities (e.g., tax lien auction or sales, lotteries, etc.)."

As a result of the torrent of requests for new numbers to be used in Florida tax lien auctions, the IRS in 2011 imposed a maximum of five new ID numbers a day per "responsible party." Last year, the agency lowered the limit even more drastically, to a single new ID number a day.

Investment funds that already had hundreds of thousands of numbers were allowed to keep them. New entrants into the field found they couldn't catch up.

Attempts at reform

In the words of Kliston's husband and fellow investor, attorney Todd Kliston, tax lien auctions have become unfair playing fields where a single bidder now can raise 200,000 paddles at once. In 2011, the Florida Tax Collectors Association urged its members to take action to restore "integrity and fairness" to the system.

Attempts are being made, to uncertain effect.

Last year, Miami-Dade County began requiring $5,000 refundable deposits from all individual bidders before the public sale began. At prior auctions, a deposit was demanded only from the parent company.

Now, a firm with 450,000 dummy subsidiaries would have to plunk down $2.2 billion.

Not surprisingly, Miami-Dade experienced a dramatic reduction in the number of bidders participating: from 1.7 million to about 64,400.

"Is it fair? I don't know. If you have more money, you have more opportunities to register more bidders," said Casamayor, the county tax collector. "But it's as fair as we could have done it."

Because of the change in IRS policy, even tax ID numbers have become a commodity to be bought and sold. According to Palm Beach County Tax Collector Anne Gannon, companies with a lot of the numbers are known to rent them to other would-be bidders.

This year, to try to limit such ploys, Palm Beach County and at least one other, Sarasota, will impose Florida's strictest rule, requiring tax lien auction participants to sign documents vowing they have no contractual, legal or financial relationship with any other bidder. Violators will be barred from future sales.

"We're hoping most people are going to play by the rules," said Debbie Coulter, tax administrator in the Sarasota Tax Collector's Office. "And if not, my guess would be that some people will tell on other people."

Palm Beach County opens for bids at palmbeachtaxsale.com May 10. The auction is June 1.

During its next tax lien sale, Broward County, like many throughout Florida, will continue to permit an infinite number of bids from any parent entity. Administrators say the current process is working in the county's favor: interest rates are low for late taxpayers and the county is receiving its money. Broward's auction site bidbroward.com opened for bids April 30; the auction is May 28-29.

The Klistons are unsure if they will be participating. Over two decades, they invested in tax liens to save extra funds, helping to put their daughter through college. But now the odds have become very long, perhaps impossibly so.